CM Biomass Partners v. Vieira (In re Jasper Pellets, LLC.)

656 B.R. 166

IN RE, JASPER PELLETS, LLC., Debtor.

CM Biomass Partners A/S, Plaintiff, v. Michelle L. Vieira, as Chapter 7 Trustee for Jasper Pellets, LLC, Defendant/Third-Party Plaintiff v. U.S. Bank Trust Company, N.A., as Indenture Trustee, Third-Party Defendant

C/A No. 22-01409-EG

Adv. Pro. No. 22-80045-EG

Consolidated with Adv. Pro. No. 23-80033-eg

United States Bankruptcy Court, D. South Carolina

Signed December 15, 2023

Linda Barr, Office of United States Trustee, Columbia, SC, for U.S. Trustee.

Michael M. Beal, Adam J. Floyd, Beal, LLC, Columbia, SC, for Defendant.

Christine E. Brimm, Barton Brimm, PA, Myrtle Beach, SC, for Trustee.

Frank B.B. Knowlton, Scott Douglas MacLatchie, II, Nelson Mullins Riley Scarborough LLP, Columbia, SC, for Plaintiff.

ORDER APPROVING APPLICATION OF SETTLEMENT AND COMPROMISE

Elisabetta G. M. Gasparini, United State Bankruptcy Judge District of South Carolina

THIS MATTER is before the Court on the Notice and Application of Settlement and Compromise (the "Settlement Motion") filed by Michelle L. Vieira, Chapter 7 Trustee (the "Trustee") for Jasper Pellets, LLC ("Debtor"),¹ and the Objection to the Settlement Motion ("USB Objection") filed by U.S. Bank Trust Company, N.A., as Indenture Trustee ("USB" or "Indenture Trustee").² The Settlement Motion seeks the approval of an agreement pursuant to Federal Rule of Bankruptcy Procedure 9019 between the Trustee and CMBiomass Partners A/S ("CMB") which would globally resolve the disputed pre-petition claims and post-petition claims between the parties (the "Settlement Agreement"). The hearing on the Settlement Motion was originally scheduled for October 19, 2023, but was continued due to the Indenture Trustee's requests to conduct discovery. An evidentiary hearing was held on December 7 and December 11, 2023, and the Trustee and her counsel, CMB's counsel, and USB's counsel were present. The Trustee was called as a witness to testify in support of the Settlement Motion and was cross-examined by USB's counsel. A total of 12 exhibits were introduced into evidence by the Trustee,³ and USB introduced three exhibits,⁴ including the deposition transcript of Trustee's counsel from October 23, 2023. After consideration of the evidence and testimony presented and a thorough review of the record before it, the Court approves the Settlement Agreement and makes the following findings of fact and conclusions of law:⁵

FINDINGS OF FACT

A. Factual Background of Bankruptcy Case

Debtor, a limited liability company organized under the laws of the state of South Carolina, is the owner of a pellet mill in Ridgeland, South Carolina (the "Pellet Mill"). The company was in the business of manufacturing biomass wood pellets but has ceased operations. Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on May 27, 2022 (the "Petition Date"). The Office of the United States Trustee appointed an Official Committee of Unsecured Creditors (the "Committee of Creditors") on June 16, 2022.

USB is Debtor's main secured creditor. It served as the Indenture Trustee for certain $11,140,000.00 South Carolina Jobs-Economic Development Authority Solid Waste Disposal Revenue bonds (AMT) Series 2018 and certain $1,360,000.00 South Carolina Jobs-Economic Development Authority Taxable Solid Waste Disposal Revenue Bonds Series 2018B (the "Bonds").⁶ The Bonds are secured by a mortgage, security agreement, and various other documents. USB asserts it has a perfected security interest in the Pellet Mill and all its improvements and personal property, as well as all proceeds and products thereof.⁷

CMB was a party to a contract with Debtor originally dated September 15, 2018—the FCA Contract for the Sale and Purchase of Wood Pellet Biomass (the "CMB Contract"). Pursuant to the CMB Contract, Debtor had agreed to sell CMB wood pellets in bulk. The CMB Contract was modified numerous times while Debtor worked on completing certain upgrades that would enable it to meet the requested production volume. The relationship between CMB and Debtor deteriorated in the spring of 2020 when the upgrades were not completed; accordingly, CMB began to reduce the price per ton being paid to Debtor to offset what CMB claimed were its damages for Debtor's alleged failure to deliver the volume of pellets required under the CMB Contract.⁸

Debtor's schedules, as amended from time to time, reflect that as of the Petition Date the company had assets valued at $25,120,557.40, including machinery and equipment with an estimated value of approximately $20 million and real property worth approximately $700,000.00.⁹ As to Debtor's liabilities, Schedule D reflects total secured debts of $12,442,951.02, the majority consisting of debt owed to USB of over $12,000,000.00 for the Bonds. Schedule E/F listed unsecured debts of $1,938,473.43, including priority debts of $48,935.36.

Upon filing for bankruptcy, Debtor sought to reject the CMB Contract.¹⁰ The parties reached an agreement as to the contract's rejection, which acknowledged that Debtor, CMB, and the Committee of Creditors were negotiating a global resolution of the amount and treatment of CMB's and Debtor's claims against one another and contemplated CMB serving as a stalking horse bidder to purchase Debtor's assets pursuant to 11 U.S.C. § 363. A consent order reflecting that agreement was entered (the "Consent Order to Reject Contract") further contemplating that if a resolution was not reached between the parties or was not approved by the Court, Debtor would be authorized to reject the Contract without further order and CMB would have thirty (30) days from the date of the rejection notice to file a proof of claim for damages.¹¹

Debtor's Claim Register reflects claims asserted against Debtor's estate in the total amount of $58,283,735.33. Pursuant to the Consent Order to Reject Contract, Debtor filed a notice of rejection.¹² That, in turn, triggered CMB's filing of its proof of claim reflecting an unsecured debt of $43,963,258.00 (the "CMB Claim"), consisting of asserted pre-petition breach of contract and rejection damages.¹³ USB filed a secured claim in the amount of $12,677,404.41.¹⁴

On February 9, 2023, Debtor objected to the CMB Claim¹⁵ seeking its disallowance on the grounds that the CMB Claim did not have sufficient supporting documentation and failed to include a distinction between the portion of its claim for alleged pre-petition breaches as compared to damages related to the rejection of the CMB Contract. As a second basis for the objection, Debtor argued that it had substantial claims against CMB which would in turn offset and reduce the amount that CMB claimed. These claims were in part based on the underlying issues of the APA Adversary Proceeding (as described below). CMB filed a response disputing the legal and factual grounds for the Claim Objection.¹⁶ Moreover, CMB argued that the Claim Objection failed to provide sufficient evidence to rebut the presumption of the proof of claim's validity. The hearing on the objection to the CMB Claim was held in abeyance and the issues were to be resolved through the APA Adversary Proceeding.¹⁷

B. Asset Purchase Agreement with CMB

On August 19, 2022, Debtor filed a motion seeking authorization under 11 U.S.C. § 363 to sell substantially all its assets and seeking the approval of bidding procedures to auction them. The Bidding Procedures Order provided that, if the sale of Debtor's assets did not close by November 15, 2022, USB would have relief from the automatic stay to exercise its state law rights and remedies.¹⁸ CMB and Debtor entered into an Asset Purchase Agreement (the "APA") on October 5, 2022, with CMB as the stalking horse purchaser.¹⁹ No parties other than CMB submitted qualifying bids. On or about October 20, 2022, Debtor, in consultation with the Committee of Creditors, designated CMB as the successful bidder.²⁰

Pursuant to the APA, CMB agreed to buy substantially all of the assets Debtor used in connection with manufacturing wood pellets for consideration of over $24,000,000.00, comprised of (a) cash consideration of $3,500,000.00, (b) assumption or reissuance of the Bonds in the amount of $12,190,000.00, (c) cash paid to the Indenture Trustee in the total amount of $2,315,606.57 for attorney's fees, interest, and past due debt service; and (d) the agreed-upon amount of the CMB Claim.²¹ As part of the APA, Debtor and CMB agreed that the entire amount of the unsecured CMB Claim would be reduced to $6,000,000.00 (the "Proposed CMB Claim Settlement").²² As to the CMB Claim, the APA further contemplated:

The CMB Claim amount [$6,000,000.00] is stipulated regardless of whether [CMB] is the Successful Bidder and shall survive any termination of this Agreement for any reason, but if, and only if, [CMB] is the Successful Bidder but the Closing does not occur because of [CMB] default, then this Section 1.5 will be null and void.²³

The APA also provided that a good faith deposit would be paid and held in escrow:²⁴

2.1.2. Prior to, or concurrently with, the mutual execution and delivery of this Agreement (the date of such mutual execution and delivery is sometimes referred to herein as the "Execution Date"), Buyer shall deposit into escrow with Beal, LLC, $250,000 (the "Good Faith Deposit") in immediately available, good funds (funds delivered in this manner are referred to herein as "Good Funds"). Per the Sale Motion, the Good Faith Deposit shall become non-refundable upon [CMB] being selected as the Successful Bidder unless [CMB]'s failure to close is no fault of [CMB] or as otherwise set forth in this Agreement. Within one (1) business day of being selected as the Successful Bidder, [CMB] shall deposit with [Debtor]'s attorney an additional deposit of ten (10%) of the proposed Cash Purchase Price (the "Earnest Money Deposit"). The Earnest Money Deposit shall be immediately non-refundable unless [CMB]'s failure to close is no fault of [CMB] or as otherwise set forth in this

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